Loan pricing rules could soon become more transparent and uniform after the Reserve Bank of India proposed a common framework for banks and non-banking financial companies (NBFCs). The proposal aims to standardise how lenders determine interest rates, making it easier for borrowers to compare loan offers, understand pricing structures, and track the impact of future policy rate changes. While the move is not expected to reduce EMIs immediately, it is designed to improve transparency, strengthen consumer protection, and ensure greater consistency in loan pricing across regulated entities.

Key Highlights

• RBI proposes uniform loan pricing rules to improve and simplify loan comparisons across banks and NBFCs.
• The framework will not immediately reduce EMIs but aims to ensure predictable interest rate transmission and stronger consumer protection.

The proposal, announced alongside the central bank's monetary policy decision on Wednesday, is not expected to reduce borrowers' equated monthly instalments (EMIs) immediately. Instead, it aims to ensure loan pricing follows a consistent framework across all regulated entities, making it easier for customers to compare loan offers and understand how changes in interest rates affect them.

Speaking after the policy announcement, RBI Governor Sanjay Malhotra described the proposal as essentially a standardisation exercise rather than a major overhaul of the lending rate framework. He said the rules have been introduced to standardise pricing, increase transparency, and help people understand how interest rates are set, calling it a rationalisation exercise that will strengthen consumer protection.

Why Is the RBI Changing the Lending Framework?

Over the years, banks have adopted different lending rate systems. Older loans are typically linked to the marginal cost of funds-based lending rate (MCLR), while many newer floating-rate loans are tied to external benchmarks such as the RBI's repo rate. NBFCs, meanwhile, generally follow their own internal pricing models.

According to an SBI report, this has resulted in multiple lending frameworks operating simultaneously. While the RBI introduced external benchmark-linked lending rates (EBLR) in 2019 to improve monetary policy transmission, around 67.6% of bank loans are currently linked to EBLR, with the remainder still operating under older frameworks.

The central bank now wants to harmonise these parallel systems without forcing lenders to abandon their existing models. The proposal also seeks to standardize practices such as benchmark reset dates and day-count conventions used for calculating interest, with the broader objective of improving transparency in loan pricing, strengthening monetary policy transmission, and enhancing consumer protection.

Why Does This Matter for Borrowers?

Experts say the proposal is less about lowering borrowing costs and more about making loan pricing easier to understand. Vijendra Singh Shekhawat, CEO of Choice Finserv Private Limited, said the problem being addressed is fragmentation, not the level of interest rates. He noted that borrowers currently navigate different lending systems - older loans linked to MCLR, newer ones linked to external benchmarks, and NBFCs following their own pricing methods - making loans difficult to compare and causing RBI policy rate changes to reach borrowers at different speeds.

Kapil Makhija, Chief Operations Officer at MinEMI, said borrowers often focus only on the headline interest rate while overlooking important clauses that determine how much they eventually pay, noting that very few borrowers understand how day-count conventions, reset dates or spread revision clauses affect their actual repayment amounts.

Will EMIs Come Down Immediately? Experts Say No

The RBI has left the repo rate unchanged at 5.25%, and the proposed framework itself does not alter lending rates. Shekhawat cautioned against overselling the reform, describing it as a structural and transparency measure rather than a rate action. He said borrowers should instead expect more predictable transmission of future repo rate changes over time, particularly for loans with shorter reset cycles.

Makhija echoed this view, noting that the real benefit will emerge only after the proposal is finalised and implemented, improving the predictability of future rate cuts rather than current borrowing costs. Kundan Shahi, Founder of loan repaytech platform Zavo, added that the biggest benefit over the coming year is likely to be predictability rather than cheaper loans, helping build long-term borrower trust.

A Simple Example of How Loan Pricing Can Vary

Consider a Rs 50 lakh home loan for 20 years at 8.5% interest, with an EMI of around Rs 43,390. According to Shekhawat, two lenders may quote the same interest rate but calculate interest differently using different day-count conventions or reset schedules, which can affect the total amount paid over the loan's tenure.

Makhija further explained that if the RBI were to cut the repo rate by 25 basis points in future, the timing of the benefit would depend on the loan's reset date - a borrower with quarterly resets would benefit sooner than one with annual resets. Standardized rules would make such timelines more transparent for borrowers.

For personal loans, Kundan Shahi noted that a borrower with a Rs 10 lakh loan over five years at 11% could save around Rs 250 a month if a future 50-basis-point repo rate cut is passed on at the next scheduled reset - with the added benefit of knowing exactly when and why the EMI changes.

Also Read: RBI Holds Repo Rate Steady at 5.25%, Sees GDP Growth at 6.7%

What Should Borrowers Check?

Experts recommend that borrowers look beyond the advertised interest rate once the final loan rules are notified, paying attention to the benchmark the loan is linked to, the frequency and date of interest rate resets, the spread or margin charged over the benchmark, the day-count convention used to calculate interest, and prepayment, foreclosure and balance transfer charges. Borrowers should also check whether the lender adjusts the EMI or extends the loan tenure when interest rates move.

While the proposal is unlikely to reduce borrowing costs overnight, it could make India's lending system easier to understand, compare and navigate - giving borrowers greater clarity on how their loans are priced and how future policy rate changes will eventually affect their repayments.